An activity analysis model of the environmental performance of firms - Application to fossil-fuel-fired electric utilities

The productivity of firms when some outputs (pollution) are undesirable has been studied in the literature for some time. In this paper we introduce an environmental performance indicator based on the decomposition of overall factor productivity into a pollution index and an input-output efficiency index. This indicator is compared to the more conventional Jaggi and Freedman (1992) model. Results are given for illustrative purposes, using data from U.S. fossil-fuel-fired electric utilities. The rankings of the utilities obtained with the two models show significant divergence, which is due to the different ways in which the undesirable outputs are dealt with, as well as due to the different possible tradeoffs between the pollutants released into the atmosphere and the resources used as inputs.